THE INTERNATIONAL - International Indian

[ GuPtara GaraMaGaraM ]
An Indian’s Open Letter
to President Obama
“The parallels to the end of the previous phase of globalisation, in 1873, are chilling.
Let us not make the same mistakes. Let us move towards a form of capitalism which
includes the possibility of a humane future for everyone in the world by means of a
global level playing field for capitalism.”
[ By Prabhu GuPtara ]
F
rom your Administration, a fresh
impetus towards open markets would
be most welcome. The alternative
to free trade is protectionism, which will
ineluctably result in conflict - or war.
The parallels to the end of the previous
phase of globalisation, in 1873, are chilling.
Let us not make the same mistakes. Let us
move towards a form of capitalism which
includes the possibility of a humane future
for everyone in the world by means of a global
level playing field for capitalism. The Achilles’
heel of the current phase of globalisation
was the WTO’s deliberate avoidance of a
level playing field - though the problem was
compounded because of the pre-existing
tendency to debasing money (“inflation”).
Right now, the world faces an
unprecedented crisis whose true
dimensions are being systematically
ignored or underplayed.
The heart of the global problem is not
currency misalignment or inter-bank
liquidity or toxic assets - these are all
important, but the key challenge is the
derivatives/hedge funds/ credit default
swaps (CDS) industry, whose global overhang
is $1,144 Trillion (or 1.14 Quadrillion). That
is as much as 23 times the total quantity of
actual wealth in the world - Global GDP
only amounts to some $50 Trillion. Even if
we mark such trades at 5% of their value, as
is usual, that still makes these trades roughly
equal to world GDP.
In other words, the mass of outstanding
CDS/Derivative/Hedge Funds cannot
be supported by all the money that all the
governments in the world can provide.
Moreover, in view of the current low appetite
for long-term bonds, it is not at all clear whether
governments will be able to raise the quantity
of money that has already been promised. So
it is possible that some 30 countries are already
bankrupt or well on the path to bankruptcy.
Much more radical and substantial action
is therefore needed. Any analysis of the
contemporary phase of globalisation (the
last 20 years or so) shows that our global
economic system suffers from alarmingly
large booms and busts. These may be
inevitable, but intelligent ways are well
established in the research literature for
smoothing both booms and busts. High
growth is always politically attractive, but
it is much more important for growth to be
sound, otherwise the illusion of so-called
growth is quickly exposed as being hollow.
Here, therefore, are some key proposals:
1. 1 As the purpose of CDSs was to provide
insurance, and it is clear that insurance
cannot in reality be provided by these at
present, all CDSs should immediately be
declared illegal, and the challenge of the
actually-existing non-insurance should be
met by government commitments to provide
minimum insurance, but no more - that is,
insurance that would enable all companies
that were “going concerns” (say, at the end
of September 2008) to continue trading.
The initial amounts invested, provided
those were before say 30 December 2007,
could be returned to the original investors.
The consequences for governments and for
companies need to be worked out in detail
but those could be good broad principles
on which to act, essentially unwinding as
safely as possible the huge industry which
should never have come into being in the
first place, at least on this sort of scale.
2. 2 Derivatives and hedge funds have two
purposes: (a) to provide insurance and (b) to
provide speculative gain. The first function
should, in accordance with item 1, also be
taken over on a similarly minimum basis
by governments, while all hedge fund and
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THE INTERNATIONAL INDIAN